It may not be the news seniors want to hear, but it’s important to face reality.
Cooling inflation is certainly a good thing. The sky-high living costs consumers were forced to grapple with for much of 2022 just weren’t sustainable.
While cooling inflation might spell relief for Americans of all ages, it could be a mixed bag for seniors on Social Security. That’s because Social Security cost-of-living adjustments, or COLAs, are tied directly to inflation.
In July, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), the index that’s used to determine annual COLAs, was up 2.6% on an annual basis. The broader Consumer Price Index had annual inflation measured at 3.2%.
In light of that reading, the nonpartisan Senior Citizens League is estimating that 2024’s Social Security COLA will amount to 3%. Compare that to the 8.7% COLA seniors on Social Security got at the start of 2023 and, well, there’s no comparison.
While a smaller COLA might be upsetting for Social Security recipients, now’s the time to recognize that next year’s raise won’t come close to 2023’s. That way, seniors can put away some extra money so they have a small financial cushion for the new year.
Why July’s CPI-W reading is so important
Social Security COLAs are measured based on third-quarter data from the CPI-W. So July’s reading, along with August’s and September’s, will determine what sort of raise seniors on Social Security will be in for next year.
The good news is that a 3% COLA in 2024 would raise the average monthly Social Security benefit of $1,789 by $53.70. That’s still a pretty nice bump.
The bad news, however, is that Medicare premium hikes could cut into 2024’s COLA. And they could leave seniors with a lot less of a raise at the end of the day.
In 2023, the cost of Medicare Part B went down for the first time in years. But Part B costs are expected to rise in 2024.
Meanwhile, seniors who are enrolled in Social Security and Medicare at the same time have their monthly premiums deducted from their Social Security benefits automatically. So any uptick in Medicare costs will directly eat away at an upcoming COLA.
Of course, it’s important to recognize that shrinking inflation is, in fact, good for seniors, as well as the broad economy. But unfortunately, even with cooling inflation, 79% of seniors say their monthly budget for essentials is higher than it was a year ago.
That said, some seniors on Social Security may be in a position to sock away extra money for the remainder of 2023, thanks to a modest dip in certain expense categories. Given the projections that are coming through for next year’s COLA, that would be a wise thing to do.
The Social Security Administration won’t officially be able to announce a 2024 COLA until October. And between now and then, that 3% estimate could shift. But the takeaway is that a much lower COLA is in store for 2024 than 2023, and seniors need to prepare for that.